The biggest financial fraud outside of the dollar

The dollar
will eventually be revealed as the biggest financial fraud ever perpetrated
against mankind.

That’s been
my long-standing prediction. Our children and grandchildren will think we’re
under some kind of mind-control device, or perhaps the fluoride in the water IS
making us dull-witted.

Believing
that a piece of paper, backed by no assets is a good store of value? Insane.

But I’m not
going to talk about the dollar today.

Today I’m
going to talk about one of the runners up in the financial fraud category.

It’s a huge
swindle that’s been perpetrated on American investors and retirees for decades
now.

I’m
referring to the 401(k) industry.

As someone
who works closely with people in the marketing field, the whole thing is
actually pretty brilliant.

Here’s how
it works: the Federal Government creates a tax loophole that lets Americans sock
away and invest part of their paycheck, pre-taxes. Then, when they retire and
begin to draw on those investments, they pay taxes on the gains.

Okay, so
that’s not the swindle. The swindle is that Americans have been convinced
utterly that all you need to do in order to retire is to shove money into your
401(k) every month.

It’s a
bastardization of the buy-and-hold strategy popularized in the value-investing
field by people like Benjamin Graham.

I briefly
discussed Mr. Graham’s definition of an investment a few days ago,
and I think it’s useful to revisit this definition to see how it contrasts with
the modern definition of buy and hold typically seen with most people’s 401(k)
strategies.

Graham
defines an investment as an operation or business
that "…upon thorough analysis, promises
safety of principle and a satisfactory return."

Before I
excoriate the average person who throws money into a 401(k) I should tell you: I
have a 401(k) through my employment here at Wyatt Research.

I’m not
against 401(k)s — they certainly serve a purpose, and they make a ton of sense
for people who get significant matching contributions from their employer.

That brings
me to a comment I received in response to my article about "speculating vs.
investing."

Lenny G
writes:

"I appreciated your
recent blog on investing or speculating. However after the recent "lost decade"
on gains where a person like me had invested his money in Mackenzie mutual funds
here in Canada whom invested in popular big names in equities, tech etc,
everything from Nestle to TD bank to Oracle to Apple and was charged in excess
of 2% M.E.R and after 7-10 years broke even because I was a "buy and hold"
investor I say the game has changed forever. Buy and hold strategies don’t work
like they used to and one must execute more trades (rebalancing) to stay ahead
in this unpredictable rigged global market."

Lenny, thanks for
writing in. But does everyone see the difference between Lenny’s strategy of buy
and hold, and Graham’s definition of an investment?

Much like the
dollar, which once was guaranteed and backed by precious metals, but slowly has
come to represent an idea of money — modern buy-and-hold strategies, like the
one that Lenny mentioned, have been confused with the classical method of
investing.

The 401(k) and
mutual fund industries have convinced the average investor that throwing your
money into a mutual fund is the same thing as being a value investor.

The regular monthly
contributions into 401(k)s and mutual funds DWARF the size of the TARP bailouts.
It’s a huge gift to financial institutions. And today, most mutual funds have
zero interest in outperforming the market. They just want to not get left
behind. So most people should probably just buy an index ETF if they want to
capture the market’s gains. There’s no reason to speculate on one mutual fund
vs. another if all you want is average gains.

In order to
be a real investor, you have to do a modicum of research. You have to understand
the business or operation you’re purchasing. Otherwise, you’re simply
speculating that the market will rise.

And listen,
there’s a time and place for speculation. But it certainly shouldn’t comprise
the large part of your portfolio, and it shouldn’t be a substitute for diligent,
research based, fundamental investing.

Even as a
newsletter editor and analyst, I beg you: do your own independent research to
come to your own conclusions. My editorials are but a stepping stone to greater
wealth and success, and no single source of information should be a substitute
for your own analysis.

Because it’s
your money! It’s your time, and it’s your livelihood. If you can’t be bothered
to go the extra mile, why would you expect a mutual fund manager to?